ACITIVITY BASED COSTING --EXERCISES

QUESTION 2 (SFINDM,1404,201502)

Winter Gear Ltd manufactures two products, Wind Proof and Cold Proof, using the same
equipment and similar processes. An extract of the production data for these products for quarter
ended 30 September 2014 is shown below:

Wind Proof Cold Proof

Quantity produced (units) 5,000 7,000

Direct labour hours per unit 1 2
Machine hours per unit 3 1
Set-ups in the period 10 40
Orders handled in the period 15 60

Overhead costs: $
Relating to machine activity 220,000
Relating to production run set-ups 20,000
Relating to handling of orders 45,000
285,000

REQUIRED:

Calculate the production overheads to be absorbed by one unit each of the products using the
following costing methods:

(a) A traditional costing method using a direct labour hour rate to absorb overheads.

(8 marks)

(b) An activity based costing method, using suitable cost drivers to charge overheads to
products.
(14 marks)

(c) Compare and contrast the answers obtained in (a) and (b).

(3 marks)

(Total: 25 marks)

--Page 1-
QUESTION 6 (SFINDM, 1402, 201411)

Office Equipment Ltd (OEL) makes a single product, namely, a commercial filing cabinet. It has
a simple Activity-Based Costing (ABC) system that it uses for internal decision making. Its ABC
system has the following activity pools and activity measures:

Activity Cost Pool Activity Measure

Volume related Number of units
Order related Number of orders
Customer support Number of customers

OEL’s manufacturing overhead incurred in 2013 was $500,000. Further analysis shows that the
total of manufacturing overhead can be divided as follows:
%
Volume related 50
Order related 35
Customer support 15
Total manufacturing overhead 100

The following activity volumes are associated with the product line for 2013:
Activity Volumes
Volume related 1,000 units
Order related 250 orders
Customer support 100 customers

The direct costs of manufacturing a unit of filing cabinet were:

Per Unit
$
Direct materials 180
Direct labour 50

REQUIRED:

(a) Compare and contrast ABC from traditional costing methods.

(5 marks)
(b) Calculate the activity-based recovery rates for each cost pool.
(9 marks)
(c) Auto Parts Ltd (APL) is one of OEL’s customers. APL ordered 80 filing cabinets over 4
different times in 2013. Each filing cabinet was sold for $595.
Required;
Prepare a statement showing the product margin and customer margin on the 80 filing
cabinets ordered by APL
(11 marks)
(Total: 25 marks)
--Page 2--
 QUESTION 1 (SFINDM, 1501,201511)

Sun Cream Ltd makes one standard product selling at $20 a unit, though discounts are allowed to
certain customers. The business is in the process of carrying out a profitability analysis of all its
customers during the financial year ended June 30, 2015.
Information about Skin Care Ltd, one of Sun Cream Ltd’s customers, is as follows:

Discount on sales price 5%

Number of products sold 40,000 units
Manufacturing cost $12 a unit
Number of sales orders 22
Number of deliveries 22
Distance travelled to deliver 120 km
Number of sales visits from Sun Cream Ltd’s staff 30

Sun Cream Ltd uses an activity-based approach to ascribing costs to customers, as follows:

Cost Pool Cost Driver Rate

Order handling Number of orders $75 an order
Delivery costs Kilo meters travelled $1.50 a km
Customer sales visits Number of visits $230 a visit

Skin Care Ltd usually takes two months’ credit, of which the cost to Sun Cream Ltd is estimated
at 2 per cent per annum.

REQUIRED:

(a) Discuss and explain the use of customer profitability analysis to monitor and achieve the
business strategies.
(5 marks)

(b) Briefly explain the three types of cost pool as parts of costs associated with selling and
distributing goods and services to customers.
(6 marks)

(c) Calculate the profit that Sun Cream Ltd derived from sales to Skin Care Ltd for the year
ended June 30 2015.
(14 marks)

(Total: 25 marks)

--Page 3--
QUESTION 3 (SFINDM, 1605, 201605)

Sport Gear Ltd makes two types of shoes, Luxs and Coms. Data regarding the two products are
given below:

Product Dircet Labour Hours per Unit Annual Production

Luxs 5 10,000 units

Coms 2 40,000 units

Additional information:

1. Luxs require $50 in direct materials per unit, and Coms require $18.
2. The direct labour rate is $20 per hour.
3. Luxs are more complex to manufacture than Coms and they require special equipment.
4. The Activity Based Costing system has the following activity cost pools:
_____________________________________________________________________
Estimated
Activity Cost Activity Overhead Activity

Pool Measure Cost Total Luxs Coms

Machine setups Number of setups $72,000 400 100 300

Special processing Machine hours $200,000 5,000 5,000 ---
General factory Direct labour hours $816,000 24,000 8,000 16,000

_____________________________________________________________________

REQUIRED:

(a) Briefly explain four (4) fundamental ways activity-based costing differs from traditional
costing methods.
(4 marks)
(b) Compute the activity rate for each activity cost pool.
(6 marks)

(c) Determine the overhead cost per unit of each product according to the ABC system.
(12 marks)

(d) Determine the total cost per unit of each product according to the ABC system.
(3 marks)
 (Total: 25 marks)

--Page 4--

QUESTION 6 (SFINDM, 1610,201707)

Window Dressing Ltd makes custom curtains for offices. The company uses an activity-based
costing system for its overhead costs. The company has provided the following data concerning
its annual overhead costs and its activity cost pools.

Overhead Costs:
Production overhead $240,000
Office expense 160,000
Total $400,000

Distribution of resource consumption:

Activity Cost Pools Making Curtains Job Support Other Total
Production overhead 35% 45% 20% 100%
Office Expense 15% 55% 30% 100%

The “other” activity cost pool consists of the costs of idle capacity and organisation-
sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity
Making curtains 4,000 meters
Job support 100 jobs
Other Not applicable

Details relating to Job #88 are as follows:

Sales revenue: $5,200
Direct material cost: $1,000
Direct labour cost: $ 480
Overhead cost: Based on 53 meters of curtains made

REQUIRED:
(a) Allocate the overhead costs to the activity costs pools.
(6 marks)

(b) Compute the activity rates (i.e., cost per unit of activity) for the Making Curtains and Job
Support activity cost pools.
(6 marks)
(c) Compute profit or loss made on Job #88.
(8 marks)
(d) Discuss and explain why individual and organization may resist switching from
traditional costing method to activity costing method.
(5 marks)
(Total: 25 marks)

--Page 5--

QUESTION 2 (SFINDM, 1701,201709)

Home Electric Trading makes two models of washers: a deluxe and a regular model. The
following are the details for the two products:
______________________________________________________________________________
Activity Usage Measures
Deluxe Regular Total
Units produced 10 100 110
Prime costs $800 $8,000 $8,800
Direct labour hours 20 80 100
Machine hours 10 40 50
Setup hours 3 1 4
Number of moves 6 4 10

Activity Cost Data (Overhead Activities)

Activity Activity Cost

$
Setting up equipment 1,200
Moving goods 800
Machining 1,500
Assembly 500
4,000
______________________________________________________________________________

REQUIRED:

(a) Calculate activity rate for each activity.

(6 marks)

(b) Calculate the unit cost for deluxe and regular models using Activity Based Costing method.
(6 marks)

(c) Calculate the unit cost for deluxe and regular models using overhead rate based on Direct
Labour Hours.
(5 marks)

(d) Describe and explain which of the above options in calculating unit cost is preferred.
 (8 marks)

(Total: 25 marks)

--Page 6--